Is Sprint Too High to Chase? It Depends

by James Brumley | August 1, 2012 6:30 am

[1]There’s nothing more exciting to watch than a turnaround story from an American underdog company[2]. Yet, at the same time, there’s nothing more maddening than a stock that has completely disconnected itself from any semblance of reason and soared into the stratosphere.

Oh, it’s a great ride while it lasts, but a huge move can make it impossible to figure out how, or even if, you should handle the stock until the volatility is reined in.

Sprint Nextel (NYSE:S[3]) fits that description oh-so well right now.

Don’t worry; Verizon Communications (NYSE:VZ[4]) and AT&T (NYSE:T[5]) still are quite secure in their Nos. 1 and 2 spots in terms of U.S. market share. But, Sprint — a company some investors had left for dead a couple of years ago — is making waves again.

Now if we can just figure out what to do with the stock.

Yes, THAT Sprint

It’s probably the last thing anybody would have seen coming two years ago. Well into 2010, Sprint was losing customers left and right to AT&T and Verizon, primarily because of poor customer service, but also because the uber-cool iPhone was only available through other carriers. The customer service woes started to be resolved a couple of years ago, and though it was questioned at the time, Sprint-Nextel’s willingness to make a $15.5 billion iPhone commitment[6] last October has paid off.

Of course, the proof of the pudding is in the numbers, and the numbers look good — sort of.

Sprint still is bleeding money. In fact, the loss actually is getting a tad bigger. But the top line was bigger in 2010 than it was in 2009, and it was bigger 2011 than it was in 2010. That’s because Sprint is taking care of the more important issue right now: subscriber growth. Indeed, Sprint has seen net postpaid-subscriber growth in its last eight quarters. Last quarter’s addition of 442,000 new postpaid customers brings the total headcount up to 56.4 million … a record for the company.

It hardly says the company is on the wrong track.

Yes, ladies and gents: Sprint’s the real deal, and it might be about to get more real. The recent overhaul of Verizon’s pricing scheme[7], then AT&T’s[8], is nothing more than an across-the-board rate hike, and it has been about as well-received as the measles. Consumers already are considering other options, and with Sprint’s LTE network performing about as well as Verizon’s or AT&T’s[9] for a lower (and fixed) price, that customer growth could be accelerating in Q3 and Q4.

It’s all good news for long-term investors. Too bad short-term traders recently have made a mess of the stock. Then again, savvy investors might be able to use that volatility to their advantage — if they can get a bead on it.

Making Sense of the Mess

If you’ve been holding S shares since the end of May, you’ve got to be loving life right now. The stock is up 71% during the past two months, doling out a gain the size of which — and the speed of which — practically nobody saw coming.

The question, of course, is how much longer can the current rally last?

Answer: It depends on your time frame.

Yes, that’s right — it’s time to reprise the ancient argument of short-term versus long-term. In the long run (as in a holding period of a year or more), Sprint-Nextel’s a buy. That doesn’t mean the long-term bulls will want or need to pay the current price of $4.40, though, because in the short run, S is overbought and aching for a pullback.

The core of the argument for a pullback now is two-pronged.

Click to Enlarge The first prong is the simple fact that the stock left behind a pretty big bearish gap back on July 26 (last Thursday). While it’s not true that the market absolutely fills in every single gap, it is true that most of them — about 80% — do get filled in. That means the odds favor Sprint at least revisiting $3.50 or lower sooner than later.

The second prong of the bearish case is the way the bullish volume was fading on Friday of last week and Monday of this week. Oh, the stock still was headed higher, but the sizes of the advances were incrementally smaller, and the volume/buying interest already was starting to slide lower.

Throw in today’s outside-day reversal, and it’s pretty clear the profit-takers are getting busy. Rather than fight ‘em, we might as well let do what they have to do, then go shopping once the counter-trend has run its course. No biggie.

I suspect a dip to the lower $3 range will more then wash out any bearish pressure, and hit the proverbial “reset” button on the rally.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.